Energy Capital & Power

Balancing Competitive Terms with Local Protections

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COVID-19 has rendered the regulatory landscape a decisive criterion against which investors measure their decisions. Now more than ever, African hydrocarbon producers are reassessing their fiscal and regulatory frameworks, with a view to minimizing risk, prioritizing transparency and ensuring their competitiveness within the global energy arena. Since March 2014, Equatorial Guinea has been working extensively with multilateral partners including the World Bank and International Monetary Fund (IMF) to overhaul its business climate. In December 2019, the IMF granted a three-year, $282-million loan under its Extended Fund Facility to support the country’s efforts in reducing financial sector vulnerabilities, driving economic diversification, cultivating good governance, increasing transparency and fighting corruption. From launching a one-stop shop for investors and entrepreneurs in January 2019 to implementing tax incentive-related measures in July 2020, the country is making every effort to achieve sustainable economic development via private sector-led growth. Moreover, Equatorial Guinea is actively seeking foreign direct investment in a range of diversified sectors, including agriculture, fishing, energy, mining, petrochemicals, manufacturing, tourism and finance, as evidenced through its Year of Energy (2019) and Year of Investment (2020-2021) campaigns.

Establishing Competitive Terms

Existing investment regulations in Equatorial Guinea seek to strengthen local participation within the extractive sector, while diversifying and attracting foreign investment in non-extractive sectors, where possible. Laws 7/1992 and 2/1994 regulate foreign investment in Equatorial Guinea, in conjunction with Foreign Investment Law (Decree 72/2018), with certain industries subject to additional regulations – for example, those operating in the extractive sector must also adhere to the 2006 Hydrocarbons Law and National Content Regulation. Under these regulations, Equatoguinean partners must hold at least 35% of share capital of foreign companies operating in the hydrocarbons sector; there is no minimum ownership requirement for non-hydrocarbons sectors. Another distinction is that apart from the hydrocarbons sector, investments must not be part of public-private partnership with a government entity. Most recently, the government enacted a new Petroleum Regulation 2/2020 in June 2020, with a view to streamlining the existing oil and gas regulatory framework, while maintaining its appeal to foreign investors.

Within the hydrocarbons sector, Equatorial Guinea’s fiscal terms are relatively flexible. The country’s production sharing contract (PSC) is governed by the 2006 Hydrocarbon Law and entitles the state to a minimum 20% stake in any PSC, carried through the exploration phase. Besides that, key fiscal provisions are set by negotiable fiscal parameters, including state participation, bonuses, royalty rates, cost recovery and profit share in recent licensing rounds, although royalties are subject to a minimum rate of 13%. Going forward, African oil and gas producers such as Equatorial Guinea will seek to ensure government revenues, while still remaining competitive and acknowledging project risks, local content requirements and high capital expenditures that E&P companies already face.

Prioritizing Transparency

While Equatorial Guinea publicly discloses its labor laws, tax codes and other regulations, the country has faced criticism for not enforcing its laws uniformly across all industries and to all companies. As a result, the government has been actively working to improve its fiscal transparency, as part of its ongoing governance and anti-corruption program with the IMF. Within the oil and gas sector, a major part of the country’s transparency push has been its ongoing admissions process to the Extractive Industries Transparency Initiative, which serves as a global standard for the responsible governance of oil, gas and mineral sectors. After receiving the official endorsement of the EITI International Secretariat in February 2019, Equatorial Guinea now awaits official validation.

Fostering Financial Inclusion

While the provision of financial services continues to grow, businesses and small- and medium-sized enterprises (SMEs) in Equatorial Guinea still face limited access to credit and financing, with interest rates reaching as much as 12-18% for mortgages and 15% for personal loans. Meanwhile, business loans necessitate significant collateral and may carry interest rates of 20% or greater. As a result, financial access remains one of the major obstacles to domestic SME growth and development, which the government has been taking several steps to mitigate. Following the onset of COVID-19, the Equatoguinean Government urged local banks to increase their electronic payment mechanisms in an effort to establish safer, cashless payments and enable heightened financial inclusion. In May 2020, the government signed onto the U.N.’s “Better than Cash” Alliance, which serves to accelerate the transition from cash to digital payments through a 75-member partnership among governments, companies and international organizations. Digitizing payments is thought to improve efficiency and transparency, as well as drive female economic participation and bring more people into the cashless economy.

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Grace Goodrich

Grace Goodrich

Grace Goodrich is a Publications Editor at Energy Capital & Power, where she writes about the intersection of energy, policy and global finance in sub-Saharan Africa's fastest-growing economies. Grace produces our Africa Energy Series investment reports in Angola and Equatorial Guinea (2019), as well as co-authored African Energy Chamber: Road to Recovery (2021).